September 27, 2017 | ECB Negative Rate Experiment May Lead to the Worst Financial Crisis in Modern History

Martin Armstrong

Martin Arthur Armstrong is the former chairman of Princeton Economics International Ltd. He is best known for his economic predictions based on the Economic Confidence Model, which he developed.

QUESTION: Mr. Armstrong; Your proposition that the quantity of money theory is dead seems to be a true earth shattering perspective. It certainly disproves the Austrian School and the events post 2008 support your statement.

The European Central Bank is supposed to traditionally pursue the goal of monetary stability. The Germans have followed the Austrian School of Economics religiously. However, the ECB has used monetary policy instruments attempting to create an annual depreciation of the euro of just under 2 per cent without success. Since the outbreak of the financial crisis in 2008, the function and importance of the ECB has changed fundamentally and drastically.

In order to avert a core meltdown of the global financial system, the ECB went beyond the American Federal Reserve and other major central banks, launching an extremely expansive monetary policy lowering the key interest rates to negative territory. This has never been done in history and the ECB experiment has created tremendous problems moving forward. Moving the deposit rate for commercial banks parking money at the central bank to the negative range of minus 0.4 per cent combined with began buying up large amounts of government bonds and later corporate bonds of the worst quality, has completely failed to stimulate the economy.

My question is this. Have the measures taken by the ECB resulted not in averting a crisis, but transforming it into a far greater risk and simply extended the entire deflationary process?

Thank you

GK

ANSWER: Absolutely. This entire policy has failed to create inflation and has proven that inflation is not driven purely by the quantity of money. Confidence is the critical factor. The rich can move their capital to foreign lands. However, the average person cannot move their labor or money offshore. They have withdrawn their cash from the banks to place in their safes at home reducing bank deposits. The negative interest rates have hurt the pension funds and the elderly who once upon a time were able to support their retirement upon interest income have been seriously devastated by the ECB and nobody talks about them – the real lost generation added to the unemployed youth.

The ECB has seriously hurt the European economy and is now trapped. It owns 40% of Eurozone debt and an uptick in rates will devastate its portfolio holdings and probably create the biggest loss in the history of any central bank. Meanwhile, governments have been on life support and never reformed. When the ECB cannot buy more government debt, watch how fast rates rise. We are looking at a crisis that has no historical precedent.